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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 31, 2005 Commission File Number 0-4539
TRANS-INDUSTRIES, INC.
----------------------
(Exact name of registrant as specified in its charter)
Delaware 13-2598139
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1780 Opdyke Court, Auburn Hills, MI 48326
-----------------------------------------
(Address) (Zip Code)
Registrant's Telephone Number, including Area Code (248) 364-0400
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities and Exchange Act
of 1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities and Exchange Act of 1934).
YES [ ] NO [X]
The number of shares outstanding of registrant's Common stock, par value $.10
per share, at March 31, 2005 was 3,139,737.
TRANS-INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
FORM 10-Q - FOR THE QUARTER ENDED MARCH 31, 2005
INDEX
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
A. Consolidated Statements of Operations ---
Three months ended March 31, 2005 and 2004.
B. Consolidated Statements of Comprehensive Income/(Loss)
Three months ended March 31, 2005 and 2004.
C. Consolidated Balance Sheets ---
March 31, 2005 and December 31, 2004
D. Consolidated Statements of Cash Flows ---
Three months ended March 31, 2005 and 2004
E. Notes to Consolidated Financial Statements.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Item 3. QUANTITIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Item 4. CONTROLS AND PROCEDURES
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
2
TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
A. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
QUARTER ENDED MARCH 31, 2005 AND 2004
3/31/05 3/31/04
---------- -----------
1. Gross sales less discounts, returns and allowances $5,269,183 $ 7,534,929
2. Cost of goods sold 4,175,441 5,605,874
---------- -----------
3. Gross profit 1,093,742 1,929,055
4. Selling, general and administrative exp. 1,869,752 1,965,333
5. Restructuring costs (note 8) - 75,601
---------- -----------
6. Operating income/ (loss) (776,010) (111,879)
7. Other (income)/ expense
Interest expense 120,824 162,508
Other (income)/expense (19,990) (6,931)
---------- -----------
Total other expense 100,834 155,577
---------- -----------
8. Earnings/(loss) before income taxes (876,844) (267,456)
9. Income tax expense/(benefit) - -
10. Net earnings/(loss) (876,844) (267,456)
11. Preferred Stock Dividend 33,716 -
---------- -----------
12. Net loss applicable common shareholders $ (910,560) $ (267,456)
========== ===========
13. Earnings/(loss) per share (Note 6):
Basic $ (.29) $ (.09)
Diluted $ (.29) $ (.09)
========== ===========
See Notes to Financial Statements
3
TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
B. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS) (Unaudited)
THREE MONTHS ENDED MARCH 31, 2005 AND 2004
2005 2004
--------- ---------
Net earnings/(loss) $(910,560) $(267,456)
Other comprehensive loss:
Equity adjustment from foreign
currency translation. (667) -
--------- ---------
Comprehensive earnings/(loss) $(911,227) $(267,456)
========= =========
See Notes to Financial Statements
4
TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
C. CONSOLIDATED BALANCE SHEETS
03/31/05 12/31/04
(Unaudited) (Audited)
------------ ------------
ASSETS
Current Assets
Cash $ 14,143 $ 20,438
Accounts receivable 4,839,721 5,620,741
Inventories (Note 2) 5,417,962 6,015,202
Prepaid expenses 436,234 406,033
------------ ------------
Total current assets 10,708,060 12,062,414
Property, Plant & Equipment, at Cost
Land 49,973 49,973
Buildings 2,123,171 2,050,251
Machinery & equipment 10,832,453 10,932,246
------------ ------------
13,005,597 13,032,470
Less: accumulated
depreciation (11,120,406) (10,992,355)
------------ ------------
Net plant and equipment 1,885,191 2,040,115
Other Assets
Patents, licenses & trademarks,
net of accumulated amortization 79,526 81,275
Net real estate held for sale 1,069,511 1,087,691
Other Assets 412,505 457,505
------------ ------------
Total assets $ 14,154,793 $ 15,729,000
============ ============
LIABILITIES AND STOCKHOLDERS EQUITY
03/31/05 12/31/04
(Unaudited) (Audited)
------------ ------------
Current Liabilities
Notes Payable (Note 5) $ 4,054,625 $ 4,350,368
Current installments
- Long term debt (Note 5) 1,866,666 1,916,667
Accounts payable - trade 3,102,595 3,225,804
Accrued liabilities 1,904,437 2,038,879
------------ ------------
Total current liabilities 10,928,323 11,531,718
Long term debt, less
Convertible promissory
note payable - 1,500,000
Other non-current liabilities 175,415 235,000
Stockholders Equity
Preferred stock, Series A, of $1 par value
per share, 100,000 authorized, 19,000
issued and outstanding. 19,000 19,000
Preferred stock, Series B, of $1 par value
Per share, 215,000 authorized, 193,799
issued and outstanding. 193,799 193,799
Preferred stock, Series B-1, of $1 par value
per share - authorized 185,000 shares;
166,667 shares issued and outstanding. 166,667 -
Common stock of $.10 par value per share,
10,000,000 authorized, 3,139,737 issued
and outstanding. 313,974 313,974
Common stock warrants, 270,385
outstanding. 422,000 195,000
Additional paid-in-capital 8,170,616 6,847,283
Accumulated deficit (6,329,937) (5,202,377)
Foreign currency translation 94,936 95,603
------------ ------------
3,051,055 2,462,282
------------ ------------
Total liabilities and stockholders' equity $ 14,154,793 $ 15,729,000
============ ============
See Notes to Financial Statements.
5
TRANS-INDUSTRIES, INC.
D. Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2005 and 2004
2005 2004
---- ----
(Unaudited) (Unaudited)
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings/(loss) $ (876,844) $ (267,456)
Adjustments to reconcile net earnings/(loss)
To net cash provided by operations:
Depreciation/amortization 185,685 217,454
Decrease (increase) in accts. receivable 781,020 1,369,438
Decrease (increase) in inventory 597,240 (43,871)
Decrease (increase) in prepaid exp. (30,201) (100,579)
Increase (decrease) in accts. payable (123,209) (336,260)
Increase (decrease) in accr. liabilities. (134,442) (104,477)
(Gain) loss on sale of property and equipment (7,475) (912)
Other 46,749 1,132
----------- -----------
Net cash provided (used) by operations 438,523 734,469
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (12,581) (159,183)
Proceeds from sale of property & equip. 7,475 912
----------- -----------
Net cash provided (used) by investing (5,106) (158,271)
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of long term debt (59,585) -
Net repayment of term borrowings (54,030) (481,013)
Net proceeds (payment) of credit line (291,714) (1,533,951)
Proceeds from issuance of preferred stock - 1,283,001
Preferred stock dividends (33,716) -
----------- -----------
Net cash provided (used) by financing (439,045) (731,963)
Foreign currency translation (667) -
----------- -----------
Net increase (decrease) in cash (6,295) (155,765)
Cash at beginning of year 20,438 166,488
----------- -----------
Cash at end of quarter $ 14,143 $ 10,723
=========== ===========
Supplemental Disclosures:
Interest paid $ 123,829 $ 141,073
Income taxes paid $ - $ -
See Notes to Financial Statements
6
TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
E. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The financial information presented as of any date other than December 31,
2004 has been prepared from the Company's books and records without audit.
Financial information as of December 31, 2004 has been derived from the
audited financial statements of the Company. In the opinion of management,
all adjustments consisting of normal recurring adjustments, necessary for a
fair presentation of the financial information for the periods indicated,
have been included. For further information regarding the Company's
accounting policies, refer to the consolidated financial statements and
related notes included in the Company's annual report on the Form 10-K for
the year ended December 31, 2004.
2 Inventories
The major components of inventories are:
03/31/05 12/31/04
----------- -----------
Raw Materials $ 2,663,719 $ 2,719,367
Work in Process 865,360 1,343,767
Finished Goods 1,888,883 1,952,068
----------- -----------
$ 5,417,962 $ 6,015,202
=========== ===========
Inventories are stated net of reserves, which are recorded as a cost of sales
expense when set up. At March 31, 2005 and December 31, 2004, reserves were
$2,126,000 and $2,128,000 respectively.
3. Principles of Consolidation
There have been no significant changes in the principles of consolidation
since our most recent audited financial statements.
4. Significant Accounting Policies
There have been no significant changes in accounting policies since our most
recent audited financial statements.
7
TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
E. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Note Payable and Long-Term Debt
The Company has a secured line of credit facility with Huntington National Bank
collateralized by substantially all assets of the Company. The facility allows
the Company to borrow up to $6,000,000. The facility bears interest at the
bank's prime lending rate plus 1.75% (effective rate of 7.5% at March 31, 2005).
Interest is payable monthly.
Long-term debt consisted of the following:
3/31/05 12/31/04
----------- -----------
Term note, payable in monthly installments of $16,667, including interest at the
bank's prime lending rate plus 1.75% (effective rate of 7.5% at March 31, 2005)
with a balloon payment of $1,000,000 on July 31, 2009. The note is secured by
substantially all the assets of the Company. $ 1,866,666 1,916,667
Subordinated Convertible Note (See note 9). - 1,500,000
Other long term commitments 175,415 235,000
----------- -----------
Total 2,042,081 3,651,667
Less current maturities 1,866,666 1,916,667
----------- -----------
Long term portion $ 175,415 $ 1,735,000
=========== ===========
The aggregate maturities of long-term debt by year are as follows:
2005 $ 1,866,666
2006 -
2007 -
2008 -
2009 -
-----------
$ 1,866,666
===========
8
TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
E. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Note Payable and Long-Term Debt (continued)
The credit facility with Huntington National Bank includes a mortgage on its
real estate for $2,000,000. The mortgage is a five year note, amortized over ten
years with monthly payments of $16,667.67 and a final balloon payment of
$1,000,000 due at maturity. Interest on the mortgage is at 1.75% (effective rate
of 7.5% at March 31, 2005) over the banks prime lending rate. Additionally, the
credit facility includes a $6,000,000 line of credit secured by all of the
Company's assets. The credit line is a three-year facility with an interest rate
of 1.25% (effective rate of 7.0% at March 31, 2005) over the bank's prime
lending rate and is payable monthly. The Company, at March 31, 2005, had
utilized $4,054,625 of its credit line with Huntington National Bank. The
Company is in violation of certain provisions in its credit agreement with
Huntington, including covenants relating to tangible net worth, a debt leverage
ratio, and a minimum fixed charge ratio. The Company is not seeking waivers from
Huntington for non-compliance with these provisions.
The Company's failure to obtain waivers for non-compliance with the credit
agreement could result in a default and the lender could elect to declare all
amounts outstanding to be immediately due and payable and terminate all
commitments to extend further credit. If we are unable to repay those amounts,
the lender could proceed against all collateral that secures the indebtedness.
If the lender under our current or future indebtedness accelerates the payment
of the indebtedness, we cannot assure that our assets or cash flow would be
sufficient to repay in full our outstanding indebtedness. As a result of these
circumstances, the Company reflected all of its existing lender debt as current,
though the lender has not accelerated term debt maturity or demanded payment.
6. Earnings (Loss) Per Share
For the three months ended March 31, 2005, and the three months ended March 31,
2004 all options outstanding have been excluded from the computation of diluted
earnings (loss) per share as the effect would be anti-dilutive.
9
TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
E. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Segment Information
The Company operates in one market segment, the transportation industry, with
products directed towards customers in the mass transit, highway, airline and
rental car segments. Financial information summarized by geographic area is
as follows:
03/31/05 03/31/04
------------------------ ------------------------
LONG- LONG-
LIVED LIVED
REVENUES ASSETS REVENUES ASSETS
----------- ----------- ----------- -----------
United States $ 3,699,154 $ 3,446,733 $ 5,415,936 $ 4,097,768
United Kingdom 14,058 -0- 39,275 -0-
Canada 1,459,085 -0- 2,034,639 -0-
Other 96,886 -0- 45,079 -0-
----------- ----------- ----------- -----------
Total $ 5,269,183 $ 3,446,733 $ 7,534,929 $ 4,097,768
=========== =========== =========== ===========
Revenue by Product Line is as follows:
PRODUCT LINE 3/31/2005 3/31/2004
- -------------------------- ----------- -----------
Lighting Products $ 2,487,978 $ 4,223,080
Digital Display Products 1,395,877 2,290,976
Mechanical Display Product 434,435 407,340
Dust Abatement Equipment 838,103 489,899
Other 112,790 123,634
----------- -----------
$ 5,269,183 $ 7,534,929
=========== ===========
8. Restructuring Costs
The Company is continuing its restructuring program initiated in 2003 aimed
at addressing profitability. Restructuring costs for the first quarter of
2004 amounted to $75,601 of consulting fees.
9. Preferred Stock
During June 2001, the Company issued 19,000 shares of 8.25% cumulative
preferred stock (Series A) with a par value of $1 to the Trans-Industries,
Inc. Employees 401(k) and Profit Sharing Plan for $1,900,000. Dividends in
arrears at March 31, 2005 totaled $599,086 or $31.53 per preferred share.
On March 4, 2004, the Company completed the sale of 193,799 shares of Series
B Convertible Preferred Stock ("Series B Stock") and 145,384.84 warrants to
purchase
10
TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
E. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Preferred Stock (continued)
common stock for $1,500,000 to the Harry E. Figgie, Jr. Trust (the "Trust"),
a trust controlled by a member of the Company's Board of Directors. Issuance
costs were $217,000. The warrants have an exercise price of $3 per share. The
warrants have been allocated a value of $195,000, which is the estimated fair
value of the warrants on the date of the sale as determined by the
Black-Scholes pricing model. The proceeds allocated to the Series B Stock are
$1,305,000. The Series B Stock contains a beneficial conversion feature of
$78,721 attributable to the difference between the ascribed value of the
preferred stock and the market value of the underlying number of common
shares into which the Series B Stock may be converted. The value assigned to
the beneficial conversion feature is amortized from the date of issuance to
the earliest conversion date and is treated as a dividend. Because the Series
B Stock is convertible at any time after issuance, the entire beneficial
conversion feature was charged directly to retained earnings. Following is a
summary of the Series B Stock features.
Dividends
The holder of Series B Stock is entitled to receive cumulative quarterly
dividends at a rate per annum of $0.387 per share, commencing on April 1,
2004. The Company at its option, in no more than eight of the first twelve
full quarters, may elect to pay the accruing dividends in additional shares
of Series B Stock at $7.74 per share or in cash.
Conversion
At the holder's option, each share of Series B Stock is convertible into
three shares of the Company's common stock. At any time after February 27,
2007 and on the business day immediately following the period of 30
consecutive business days on which trades occur during which the market price
of the Company's common stock equals or exceeds $5.16 per share, each share
of Series B Stock will automatically be converted into three shares of common
stock
Redemption
At any time after February 27, 2007, the Company may, at its option, redeem
all, but not less than all of the holder's unconverted shares of Series B
Stock by paying cash equal to the stated value, $7.74 per share, plus all
declared or accumulated but unpaid dividends.
Liquidation
In the event of any liquidation, dissolution or winding up of the Company,
either voluntary or involuntary, the holder of each share of Series B Stock
is entitled to receive, prior to and in preference to any distributions to
the holders of common stock, an amount equal to the stated value of $7.74 per
share, plus unpaid, accrued and accumulated dividends.
11
TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
E. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Preferred Stock (continued)
Voting rights
The holder of Series B Stock has the right to vote with other stockholders of
the Company on an as-converted basis.
Issuance of Subordinated Convertible Note
In connection with the initial closing of the sale of Series B Stock and related
warrants described above, the Company granted an option to the Harry E. Figgie,
Jr. Trust to purchase between 55,556 and 166,667 shares of Series B-1
Convertible Preferred Stock ("Series B-1 Stock") and related warrants for $9 per
share, including warrants. The option required approval by the Company's
stockholders pursuant to certain National Association of Securities Dealers,
Inc. ("NASD") rules providing for qualitative listing requirements applicable to
securities traded on the NASDAQ National Market and NASDAQ SmallCap Market. The
Company received stockholder approval at the Company's January 19, 2005 annual
meeting.
Huntington National Bank required an additional capital infusion as a condition
to the closing of the refinancing completed in August 2004. While the Harry E.
Figgie, Jr. Trust indicated willingness to provide the new capital, exercise of
the option discussed above was not possible until approval by the Company's
stockholders pursuant to NASD rules. Therefore, the Trust loaned the Company
$1,500,000 in exchange for a subordinated convertible note. Interest on the
subordinated note was at Huntington National Bank's prime lending rate plus
1.75% (effective rate of 7.00% at December 31, 2004). The principal and accrued
interest due under the note was convertible into a number of shares of Series
B-1 Stock calculated at a price of $9 per share and a number of warrants to
purchase shares of B-1 Stock equal to 25% of the number of shares of common
stock that the shares of Series B-1 Stock are convertible into. The holder of
shares of Series B-1 Stock is entitled to receive quarterly dividends at a rate
per annum of $0.45 per share. In addition, the shares of Series B-1 Stock have
conversion, redemption, and voting rights identical to those of the shares of
Series B Stock.
On January 19, 2005, the convertible promissory note holder converted the note
and received 166,667 shares of Series B-1 Stock and warrants to purchase 125,000
shares of common stock. The warrants have an exercise price of $3.00 per share.
The warrants have been allocated a value of $227,000, which is the estimated
fair value of the warrants on the date of the sale as determined by the
Black-Scholes pricing model. The preferred stock contains a beneficial
conversion feature of $217,000 attributable to the difference between the
ascribed value of the preferred stock and the market value of the underlying
number of common shares into which the preferred stock may be converted. The
value assigned to the beneficial conversion feature is amortized from the date
of issuance to the earliest conversion date and is treated as a dividend.
Because the preferred stock is convertible at any time after issuance, the
entire beneficial conversion feature was charged directly to retained earnings.
Following is a summary of the Series B-1 Stock features.
12
TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
E. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Preferred Stock (continued)
Dividends
The holder is entitled to receive cumulative quarterly dividends at a rate per
annum of $0.45 per share, commencing on April 1, 2005. The Company, at its
option and in no more than eight of the first twelve full quarters, may elect to
pay these dividends in the form of additional shares of Series B-1 Stock at a
stated amount of $9.00 per share, or in cash.
Conversion
At the holder's option, each share of Series B-1 Stock is convertible into three
shares of the Company's common stock. At any time after February 27, 2007 and on
the business day immediately following the period of 30 consecutive business
days on which trades occur during which the market price of the Company's common
stock equals or exceeds $5.16 per share, each share of Series B-1 Stock will
automatically be converted into three shares of common stock.
Redemption
At any time after February 27, 2007, the Company may, at its option, redeem all
outstanding shares of Series B-1 Stock by paying cash equal to the stated value
of $9.00 per share, plus all declared and accumulated but unpaid dividends.
Liquidation
In the event of any liquidation, dissolution or winding up of the Company,
either voluntary or involuntary, the holder of each share of Series B-1 Stock is
entitled to receive, prior to and in preference to any distributions to the
holders of common stock, an amount equal to the stated value of $9.00 per share,
plus declared and accumulated but unpaid dividends.
Voting rights
The holder of Series B-1 Stock has the right to vote with other stockholders of
the Company on an as-converted basis.
10. Stock Based Compensation
At March 31, the Company has a stock-based employee compensation plan, which is
described more fully in Notes B & I in the Company's Annual Report Form 10-K.
The Company accounts for this plan under the recognition and measurement
principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and
related Interpretations. No stock-based employee compensation cost is reflected
in net income, as all options granted under those plans had an exercise price
greater than or equal to the market value of the underlying common stock on the
date of grant. The following table illustrates the effect on
13
TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
E. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Stock Based Compensation (continued)
net earnings (loss) and earnings (loss) per share if the company had applied the
fair value recognition provisions of FASB Statement No. 123, Accounting for
Stock-Based Compensation, to stock-based employee compensation.
Three Months Ended March 31,
----------------------------
2005 2004
----------- -----------
Net earnings (loss), as reported $ (910,560) $ (267,456)
Deduct: Total stock-based employee compensation
expense determined under fair value based method for
all awards, net of tax (15,093) (15,733)
----------- -----------
Pro forma net earnings (loss) $ (925,653) $ (283,189)
=========== ===========
Earnings (loss) per share:
Basic-as reported $ (.29) $ (.09)
Basic-pro forma $ (.29) $ (.09)
Diluted-as reported $ (.29) $ (.09)
Diluted-pro forma $ (.29) $ (.09)
In December 2004, the FASB issued a revision of FAS 123, "Share-Based Payment"
(FAS 123R). FAS 123R requires that the compensation cost relating to share-based
payment transactions be recognized in financial statements. The cost to be
recognized will be measured based on the fair value of the equity or liability
instruments issued. The scope of FAS 123R includes a wide range of share-based
compensation arrangements including share options, restricted share plans,
performance-based awards, share appreciation rights and employee share purchase
plans. FAS 123R replaces FAS 123, "Accounting for Stock-Based Compensation," and
supersedes APB Opinion No. 25 (APB 25), "Accounting for Stock Issued to
Employees." As originally issued in 1995, FAS 123 established as preferable a
fair-value-based method of accounting for share-based payment transactions with
employees. However, that statement permitted entities the option of continuing
to apply the guidance of APB 25 as long as the footnotes to the financial
statements disclosed what net income would have been had the preferable
fair-value-based method been used. At that time, we determined to continue to
apply the guidance of APB 25 and make the required disclosures in our financial
statement footnotes. Accordingly, we will be required to change our method of
accounting for stock compensation costs. We will be required to adopt FAS 123R
as of January 1, 2006. FAS 123R applies only to those awards granted or which
become vested after the required effective date. We expect that the adoption of
FAS 123R in the first quarter of 2006 will have no material effect on our
results of operations, financial condition or cash flows.
14
TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For The Three Months Ended March 31, 2005
Forward-Looking Statements
This discussion highlights significant factors influencing the financial
condition and results of operations of Trans-Industries, Inc. It should be read
in conjunction with the financial statements and related notes. This discussion
includes certain forward-looking statements based on management's estimate of
trends and economic factors in the markets in which the Company is active, as
well as the Company's business plans. We have used words such as "may", "will",
"expect", "anticipate", "believe", "estimate", "plan", "intend", and similar
expressions in this report to identify forward-looking statements. In light of
recent securities law developments, including the "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995, the Company notes that
such forward-looking statements are subject to risks and uncertainties.
Accordingly, the Company's actual results may differ from these set forth in
such statements. Among these are significant changes in economic conditions and
regulatory or legislative changes that can affect the Company, its competitors,
or the markets in which it is active. The Company believes any forward-looking
statements it has made are based on current management expectations and they are
subject to risks and uncertainties. These risks and uncertainties include, but
are not limited to the following:
- Uncertainties discussed in "Management's Discussion and Analysis"
and those set forth elsewhere in this report and the Company's other
SEC filings;
- The continued forbearance by the Company's bank lender of its right
to call the Company's outstanding bank debt;
- A further decline of economic conditions in general and in the mass
transit industry in particular;
- Changes in customer requirements or reduced demand for the Company's
products and services;
- The inability of the Company to successfully implement its
informational systems operation restructuring program;
- Competitive factors (including the introduction or enhancement of
competitive products and their successful introduction into the
marketplace);
- Product pricing decreases and component price increases that may
result in materially reduced gross profit margins for the Company's
products;
- Unforeseen increases in operating expenses; and
- The inability to attract or retain management, sales or engineering
talent.
All of our forward-looking statements should be considered in light of the above
factors and all other risks discussed from time to time in our filings with the
Securities and Exchange Commission. We do not undertake to update our
forward-looking statements to reflect future events or circumstances.
15
TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For The Three Months Ended March 31, 2005
Results of Operations
Sales for the first quarter of 2005 were $5,269,183 compared with $7,534,929 for
the same period a year ago. This decrease of $2,265,746 was primarily due to
decreased sales of the Company's lighting products and its digital display
products. Sales for lighting products and digital display products were down for
the first quarter of 2005 by approximately $1,735,000 and $895,000 respectively,
compared to the first quarter of 2004. Sales of dust abatement equipment
recorded a moderate increase of $348,000 for the first quarter of 2005 compared
to the same quarter of 2004. The reduction in lighting products revenues is a
result of reduced transit bus production, lower demand for the Company's modular
parcel racks, and market acceptance of a competitor's product. Reduced sales of
digital display products were primarily attributable to reduced sales of
overhead highway signs. Cost of sales for the first quarter of 2005 was
$4,175,441 compared with $5,605,874 for the first quarter of 2004. This
reduction of $1,430,433 is the result of lower sales for the 2005 period.
For the first quarter of 2005, the Company posted a loss of $910,560, or $.29
per share, compared to a loss of $267,456, or $.09 per share, for the same
period of 2004. This increased loss amounted to $643,104 and was primarily the
result of decreased sales. For the first quarter of 2005, the Company's general
and administrative costs totaled $1,869,752, a slight decrease from the first
quarter of 2004.
Interest
Interest expense amounted to approximately $121,000 and $163,000 for the first
quarters of 2005 and 2004, respectively. This decrease of $42,000 was primarily
the result of lower debt levels in 2005, and lower interest rates.
Liquidity and Capital Resources
As of March 31, 2005, the Company was in violation of certain provisions in its
credit agreement with Huntington National Bank, including covenant requirements
relating to tangible net worth, leverage ratio, and minimum fixed charge ratio
and, as a result, all debt obligations to Huntington are callable at March 31,
2005. The Company has not sought waiver of these covenant violations from
Huntington and the lender could elect to declare a default, rendering all
amounts outstanding immediately due and payable and terminating all commitments
to extend further credit. In the event of a declaration of default, if the
Company is unable to repay outstanding amounts the lender could proceed against
the collateral securing the indebtedness.
16
TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For The Three Months Ended March 31, 2005
Liquidity and Capital Resources (continued)
If Huntington declares a default or otherwise accelerates the payment of the
Company's obligations, there is no assurance that the Company's assets or cash
flow would be sufficient to repay the amounts due. As a result of these
circumstances, the Company has reflected all obligations to Huntington as
current liabilities, although the lender has not accelerated or demanded
payment. The Company continues to have frequent discussions with Huntington. The
relationship is cooperative, cordial and professional. The Company and
Huntington are currently discussing options, including additional equity
infusion, to alleviate the credit facility issues. The Company expects
Huntington to continue to extend the Company credit during this period of
resolving the credit issues.
In connection with the issuance of Series B Stock and related warrants, the
Company granted an option to purchase between 55,556 and 166,667 shares of
Series B-1 Stock and related common stock warrants for $9 per preferred share
and warrant unit. This option grant was approved on January 19, 2005 by the
Company's stockholders pursuant to certain NASD rules providing for qualitative
listing requirements applicable to securities traded on the NASDAQ National
Market and NASDAQ SmallCap Market.
Immediately after approval by the stockholders of the Company, the note was
automatically converted into 166,667 shares of Series B-1 Stock (calculated at a
price of $9.00 per share) that were issued to the Investor; and the Company also
issued a warrant to purchase 125,000 shares of Common Stock at a price of $3.00
per share to the Investor. Each outstanding share of Series B-1 Stock is
convertible into three shares of Common Stock. In addition, the shares of Series
B-1 Stock have conversion, redemption, and voting rights identical to those of
the shares of Series B Stock
For 2005, anticipated working capital requirements are expected to be met from
the cash flow from operations and the sale of one or more of the Company's
manufacturing facilities. At December 31, 2004, there were no material
commitments for capital expenditures for the ensuing year beyond the Company's
normal tooling and line maintenance requirements.
17
TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISK
We are exposed to the impact of interest rate changes and, to a lesser extent,
foreign currency fluctuations. We have not entered into interest rate
transactions for speculative purposes or otherwise. Our foreign currency
exposures were immaterial as of March 31, 2005. Our primary interest rate risk
exposure has resulted from floating rate debt related to our revolving loan
facility and would be immaterial to our results from operations if rates were to
increase 1% from March 31, 2005 rates. We currently do not hedge our exposure to
floating interest rate risk.
Item 4. CONTROLS AND PROCEDURES
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES.
Our Chief Executive Officer and Chief Financial Officer have concluded, based on
their evaluation as of March 31, 2005, that the Company's disclosure controls
and procedures were not effective during the quarter-ended March 31, 2005.
This determination was made because of our Chief Executive Officer and Chief
Financial Officer's belief that the Company's resources have been insufficient
to address its financial reporting requirements in a timely fashion during
recent periods. The Company has had to extend the filing deadlines for it's
fiscal year 2004 Form 10-K, its fiscal year 2003 Form 10-K, its September 30,
2003 Form 10-Q and three of its fiscal year 2004 Form 10-Qs because it lacked
the resources to address the financial reporting related to significant and
complex business transactions.
In particular, the Company has suffered from insufficient personnel resources.
Additionally, the Company has struggled with complying with the increased
reporting requirements that have resulted from the Sarbanes-Oxley Act and new
National Association of Security Dealers rules. Areas of the Company's internal
controls and procedures that are insufficient include inventory quantity
determination, inventory valuation, revenue recognition, warranty obligations,
controls over fair value of equity securities, basic controls over the accuracy
of general ledger information and controls over accounting for income taxes and
required disclosure. Certain of these areas were recently brought to our
attention by the Company's auditors and we are currently assessing these areas.
The Company's internal controls and procedures are also ineffective in ensuring
that material information relating to the Company is made known to the Chief
Executive Officer and Chief Financial Officer by others within the Company.
Specifically, our independent auditors have advised the Company that internal
controls over the following aspects of the Company's accounting are insufficient
or non-existent and represent reportable conditions that they believe to be
material weaknesses: inventory quantity determination, inventory valuation,
revenue recognition, warranty obligations, controls over fair value of equity
securities, basic controls over the accuracy of general ledger information and
controls over accounting for income taxes and required disclosure.
18
TRANS-INDUSTRIES, INC. AND SUBSIDIARIES
Item 4. Controls & Procedures (continued)
The Company reported in its September 30, 2004 Form 10-Q that as a part of its
evaluation of internal controls and procedures, it expected that Company
personnel would have additional time to devote to financial reporting in the
fourth quarter of 2004, that an employee was added to the Company's staff
responsible for compliance with reporting obligations in November 2004, and that
the Company expected that its disclosure controls and procedures would be fully
effective during the fourth quarter of 2004 or soon thereafter. However, the
additional staff and employee time was insufficient to provide the company with
necessary resources to adequately address its internal controls and procedures.
In addition, Company staff utilized additional time to adjust to the procedures
of its new auditor.
The Company, including its new Chief Executive Officer appointed on March 16,
2005, is continuing to evaluate its resources for addressing its financial
reporting and making appropriate changes to provide sufficient resources and
time to prepare and file periodic reports within the time periods specified in
the SEC's rules and regulations and provide for reviews by management, the Audit
Committee and the Board of Directors. Our Chief Executive Officer and Chief
Financial Officer are, in connection with the evaluation, reviewing our
personnel, resources and disclosure controls and procedures. The evaluation is
intended to lead to changes that will ensure that our disclosure controls are
effective at a reasonable assurance level. Specifically, the evaluation is aimed
at ensuring that our disclosure controls are effective for gathering, analyzing
and disclosing in a timely manner the information we are required to disclose in
our reports filed under the Securities Exchange Act of 1934. In addition, the
Company was able to timely file this Form 10-Q and expects to timely file
future periodic reports.
(b) CHANGES IN INTERNAL CONTROLS
There were no changes in the Company's internal controls over financial
reporting that occurred during our last fiscal quarter that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting. However, as noted above, the Company has
taken, and is continuing to take, certain actions designed to enhance the
Company's internal control over financial reporting and its disclosure controls
and procedures.
Item 6 EXHIBITS
EXHIBIT INDEX
Exhibit No. Description
Exhibit 31.1 Sarbanes-Oxley, Section 302 CEO certification.
Exhibit 31.2 Sarbanes-Oxley, Section 302 CFO certification.
Exhibit 32.1 Sarbanes-Oxley, Section 906 CEO certification.
Exhibit 32.2 Sarbanes-Oxley, Section 906 CFO certification.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of l934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRANS-INDUSTRIES, INC.
Date: May 16, 2005 /s/ Kai Kosanke
--------------------------
Kai Kosanke, Treasurer
Chief Financial Officer and
Principal Financial Officer
Date: May 16, 2005 /s/ Keith LaCombe
--------------------------
Keith LaCombe
Assistant Treasurer
20
EXHIBIT INDEX
Exhibit No. Description
- ----------- ----------------------------------------------
Exhibit 31.1 Sarbanes-Oxley, Section 302 CEO certification.
Exhibit 31.2 Sarbanes-Oxley, Section 302 CFO certification.
Exhibit 32.1 Sarbanes-Oxley, Section 906 CEO certification.
Exhibit 32.2 Sarbanes-Oxley, Section 906 CFO certification.